Union Budget 2020
It gives us immense pleasure in presenting our analysis of the Direct Tax proposals of the Union Budget of India for the year 2020.
The slow-down in economic growth set high expectations from the Finance Minister (FM) to present a radical and path-breaking budget to provide a strong stimulus to boost demand and growth. But that’s the thing with path-breaking budgets – they are path-breaking because they are announced once in a while!
Seen from the prism of whether the Budget was a path-breaking one, we believe it was not. Given the limitation on resources, reflected in the fiscal deficit being pegged at 3.80% of GDP (which is a 50 basis points deviation from plan estimates), we believe the FM has largely been pragmatic and refrained from taking any knee-jerk reaction to stimulate growth. She has instead preferred to be ready for the long haul. In what was the longest Budget speech ever, extending to more than 150 minutes, the Budget is based on three key themes – Aspirational India, Economic Development and Caring Society.
On the tax front, the Budget contains several changes which are likely to impact almost all taxpayers in some form or the other. In 2019, the Government announced a massive corporate tax reduction by reducing the effective tax rate to 25.17% for existing companies and 17.16% for newly set up manufacturing companies. Therefore, not much room was left to provide further relief in tax rates to corporates and the Budget reflects the same.
The Budget contains positive proposals to boost receipt of foreign debt funding, granting exemption to non-residents earning passive income from India from filing tax returns, extension of tax holidays for start-ups and affordable housing sector, etc.. It abolishes Dividend Distribution Tax, modifies rules to determine tax residency, aims to widen the tax net by extending the withholding tax regime to new areas and seeks greater transparency in tax administration through electronic appellate and penalty proceedings. The FM announced an Income-tax Dispute Resolution Scheme Vivaad se Vishwas to settle income-tax disputes pending before appellate authorities. This scheme will be implemented by 30 June 2020 and the operational details will be announced soon.
The New Regime of personal taxation with lower tax rates in lieu of giving up of multiple exemptions and deductions, however, is confusing for an ordinary taxpayer and may not yield much tax savings. There could have been a simpler way of achieving the intended objective. Also, the Budget is remarkably silent on growth of manufacturing sector, employment creation and measures to boost the health of the banking sector.
Our analysis on the Union Budget covers the key income-tax changes proposed by the FM and discusses their likely impact on taxpayers and questions that they may raise in respect of their implementation. Some peculiar sector-specific changes are not discussed for brevity.
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We look forward to your feedback on our analysis.
Alternative tax regime for Individuals and HUF (from FY 2020-21)
The Budget proposes to introduce a simplified tax regime for Individuals with reduced tax rates, as follows:
This new regime is optional and the taxpayer will have a choice whether to be governed by the existing regime or New RegimeA taxpayer opting for the New Regime cannot claim the following exemptions and deductions:
Further, the following benefits shall not be available for taxpayers opting for New Regime:
Set-oﬀ of brought forward losses and unabsorbed depreciation arising from the deductions specified in the table above, shall not be allowed
Current year loss under the head ‘House Property’ cannot be set-oﬀ against any other income
The depreciation allowed for tax purposes shall be calculated as per a separate methodology that will be announced in due course. Further, Alternate Minimum Tax (AMT) shall not apply to individuals and HUF opting for New Regime.
The following exemptions and deductions shall be available under the New Regime:
Employer’s Contribution to National Pension System (Section 80CCD(2))
Deduction for employment of additional workmen (Section 80JJAA)
Transport Allowance for a differently-abled employee
Conveyance Allowance for expenses on conveyance in performance of official duties Relocation Allowance
Per Diem Allowance
The taxpayer has to inform the Tax Authorities if he wants to opt for the new regime Taxpayers having business income should opt for the New Regime before the due date of filing the Return of Income of the relevant year. Once such a taxpayer chooses the New Regime, he cannot withdraw his choice for that year. He can withdraw his choice for the subsequent years. However, once he opts out of the New Regime, he cannot thereafter opt for the New Regime for subsequent years. However, if such an individual does not have business income in subsequent years, he can opt to be governed by the New Regime
Taxpayers who do not have business income can decide on opting for the new tax regime on a year-on-year basis.
If the taxpayer fails to satisfy the conditions of the New Regime, his choice to opt for the New Regime shall be considered as invalid. In such a case, his tax liability will be computed as if he never opted for the New Regime.
The key question before the taxpayers would be whether to opt for the New Regime. This decision will require careful consideration of the likely tax liability under the existing and the New Regime to make a decision.
Taxpayers having business income should consider their probable tax position for the new few years before making a decision since they have only one opportunity of opting for the New Regime.
It appears that the New Regime may not be helpful for salaried taxpayers staying in a rented accommodation or having an existing home loan from an employer’s perspective, the question arises as to how to calculate the TDS on salaries. Does the employer check with each of this employees as to whether they will opt for the New Regime? The New Regime does not make any corresponding amendments to TDS provisions. Hence, presently, the answer seems to be that the employer has to calculate TDS on salaries based on the existing regime. The New Regime is for the employee to consider in his personal tax return and not for the employer to consider while calculating TDS on salaries.
This position could entail situations where the TDS on salaries is higher than the tax liability of the employee; Whereby the employee would be required to claim a tax refund in his tax return.
The New Regime is available for all individuals and HUF irrespective of their income levels. For instance, a salaried individual with taxable income of INR 32 lacs (say), shall also be eligible for the New Regime.
It appears that the new regime shall equally apply to Residents and Non-Residents.
Increase in turnover limit for concessional tax rate for domestic companies (from FY 2020-21)
Domestic companies are presently taxed at 25%, plus applicable surcharge and cess, if their turnover does not exceed INR 250 crore (INR 2.5 billion) for FY 2017-18. Separately, these companies were recently provided the alternative of opting for the lower tax rate of 25.17%, without claiming tax incentives and deductions. A separate provision granting a concessional tax rate of 17.16% was also introduced for newly set up manufacturing companies.It is proposed to extend the benefit of tax rate of 25% to companies having turnover up to INR 400 crore (INR 4 billion) for FY 2018-19.
The choice to opt for the concessional tax rate of 17.16% or 25.17% remains unaﬀected. The above proposal is relevant for companies who do not opt for the concessional tax rate of 22%.
Modifications to regulations determining tax residential status (from FY 2020-21)
Presently, an individual is considered to be a tax resident of India if either of the following conditions is satisfied: He is in India for a period of 182 days or more during the financial year, OR, He is in India for a period of 60 days or more during the financial year AND he is in India for a period of 365 days or more in the preceding 4 financial years. In case of Indian Citizens who are based outside India and who come to India for casual visits, the period of 60 days referred above is replaced by 182 days. This provision allows such Indian citizens to visit India for ex- tended periods without attracting tax residency. It is now proposed that in case of Indian Citizens who are based outside India and who come to India for casual visits, the period of 182 days referred above shall be replaced by 120 days. Presently, an individual or HUF which is an Indian tax resident is considered as Resident but Not Ordinarily Resident if individual or the manager of the HUF is a non-resident for 9 out of 10 preceding financial years. It is now proposed that the individual or HUF shall be considered as Resident but Not Ordinarily Resident if he is a non-resident for 7 out of 10 preceding financial years.
It is also proposed that an Indian citizen who is a non-resident but is not liable to tax in any other country or territory by reason of his domicile, residency or any other criterion of similar nature shall be considered to be a resident in India. Residential status of an individual determines what part of his income is taxable in India. A Resident and Ordinarily Resident is liable to tax in India on his world-wide income whereas a non-resident is liable to tax in India on income accruing or arising in India. The above proposals aim at creating a narrow criteria for determining residential status of an individual in India.
For Indian Citizens settled abroad and visiting India, the period of 180 days has been reduced to 120 days. Such persons coming on an extended visit to India need to be mindful of the changed tax residency rules, lest they are regarded as tax residents of India. The proposal in relation to assuming tax residency in India for Indian Citizens who are not liable to tax in any other country is significant. Generally referred to as “Stateless persons”, such persons are not required to discharge tax liability in any country due to peculiar interplay of tax laws of different countries. This proposal could have adversely impacted Indian citizens working overseas in countries where there is no personal income tax. In this regard, the Government issued a Press Release on 2 February 2020 to clarify that this proposal shall not impact bona fide citizens of India working overseas. The Press Release also clarified that where an individual becomes resident in India under these changed residency rules, his income earned outside India shall not be taxed in India if it does not relate to his Indian business or profession.
It would be interesting to consider the interpretation of the term “not liable to tax”. It may be possible to take a position that the term ‘not liable to tax’ refers to situations where the foreign country’s tax laws have provisions charging income-tax but the concerned individual is not liable to tax in that country due to specific tax law provisions. Therefore, it may be argued that the above proposal will not apply to cases where there is no income-tax in the first place. The strength of this argument requires deeper analysis and deliberation, Since this proposal applies only to Indian citizens, a fall-out of this proposal could also see certain individuals voluntarily giving up their citizenship of India.
In FY 2020-21, even if a person based in a no-tax country becomes a tax resident of India due to this proposal, his status could be of a Resident but Not Ordinarily Resident, in which case, he will not be liable to tax in India on the income earned and received outside India. The tax liability in India will be triggered in true sense in the 4th year i.e. FY 2023-24, assuming that he has been outside India for a fairly long period of time.
Abolition of Dividend Distribution Tax and moving to classical system of taxing dividends (from FY 2020-21)
Presently, dividends declared by companies are subject to Dividend Distribution Tax (DDT) in the hands of the company at an effective rate of 20.56%. Furthermore, dividends in excess of INR 1,000,000 are taxed in the hands of the shareholders @ 10% plus applicable surcharge and cess (except for domestic companies and certain excluded cases) These provisions were inserted for administrative convenience where it was easier to collect DDT at the company-level rather than taxing respective shareholders. The present system resulted in two-level taxation, firstly by way of DDT at company-level and thereafter at shareholder-level. Also, since DDT was not in the nature of withholding tax, non-resident shareholders faced difficulties in claiming tax credit for the same in their home country.
It is now proposed to abolish the DDT in entirety and to make dividends taxable in the hands of the shareholders as any other income, as per the applicable slab rates. The taxpayer shall be permitted a deduction of interest expense against the dividend income, but to the extent of 20% of the dividend income. The company declaring dividends shall withhold tax @ 10% on dividends exceeding INR 5,000. Payments of dividends to non-residents shall attract tax withholding at applicable rates similar changes are proposed in respect of dividends declared by Mutual Funds.
Presently, there is considerable litigation under section 14A which provides that expenditure incurred for earning exempt income shall not be tax deductible. Litigation arose in cases where the capital gains from sale of shares was taxable whereas dividend was tax exempt. Now that the dividend income is taxable, this controversy shall be put to rest Dividends declared to non-resident shareholders will require tax withholding in India at the rate of 20% plus applicable surcharge and cess. Such taxpayers will now be eligible to avail concessional tax rates for dividends as provided under the applicable tax treaties. Where the tax treaty rates are applied, such non-resident taxpayers shall be required to file their tax returns in India. This proposal shall however increase the overall tax incidence on shareholders having taxable income of more than INR 1,000,000 as the tax paid on dividends shall be more than the amount of DDT. This will particularly affect trust structures set up by promoters for succession planning purpose this proposal would have a positive impact on government companies and will result in higher cash inflow in the hands of the government Investments in mutual funds could also see modifications with investors opting for investment in growth schemes over dividend schemes. The provisions of Buy-back tax remain unchanged. It is possible that the buy-back regime, which had lost its sheen in the recent past, could see renewed interest to release surplus cash available with companies in lieu of distribution of profits as dividend in cases where the effective tax rate on dividends is higher than effective rate of buy-back tax of 23.296%
Relief from cascading effect of dividends (from FY 2020-21)
Under the new proposals, where a company (say, 1st company) receives dividends from other companies (say, 2nd company), such dividends will be taxable in the hands of the 1st company. Where the 1st company pays dividends to its shareholders out of dividends received from the 2nd company, the dividend so paid by the 1st company will not be allowed as a deduction to it, resulting in a potential double taxation of the same dividend income. To provide relief to the 1st company in such cases, it is proposed that the dividends received from 2nd company shall be allowed as a deduction to the 1st company, if the 1st company declares and distributes dividend at least one month prior to the due date of filing the return of income.
This is a beneficial proposal to remove cascading effect of dividends and shall, in particular, benefit investment holding companies. A question that arises is where the 1st company distributes dividend prior to receipt of dividend from 2nd company (say, interim dividend), whether the deduction for dividend declared by the 2nd company shall be permitted against such interim dividend. Based on the wordings of the proposal, it appears that such a claim may be possible.
Monetary limit for tax-exempt contributions (from FY 2020-21)
Presently, contributions made by an employee to Provident Fund, Superannuation Fund and National Pension Scheme are exempt from tax, within the limits provided by the respective welfare schemes. This has resulted in employees drawing high salaries making large contributions to these schemes and avail the tax exemptions. Since the accruals and withdrawals from these schemes are also largely exempt from tax, the said contributions suﬀer minimal or no taxation. It is therefore proposed to provide that the exemption from contribution to these schemes shall be restricted to INR 750,000 per year in aggregate. Contributions in excess of INR 750,000 shall be taxable in the hands of the employee. Further, accruals on such excess contribution will also be taxable as a perquisite.
This proposal is a rationalization proposal aimed at restricting the tax exemption from social welfare schemes to high-salary employees considering the limit of INR 750,000, companies may need to have a relook at the compensation structures of their top executives and make necessary modifications thereto, It is important to note that there are no restrictions on making contributions in excess of INR 750,000. If an employee is not desirous of claiming the tax exemption on excess contribution, it shall be permissible to make contributions in excess of INR 750,000 the proposal states that the accruals on excess compensation will be taxed as perquisite. This may cause a hardship to the employer since the employer may be required to obtain information of accruals on excess compensation to determine the tax withholding on salaries. The complexity could increase where the employee changes employment and the excess contribution was made under his former employer. It is therefore expected that while the accruals on excess compensation could be taxed, such accruals should be taxed as income from other sources so that the employer is not required to consider these accruals while calculating withholding tax on salaries.
Exemptions to non-residents from filing Tax Returns in India (from FY 2019-20)
Presently, non-residents earning income from royalties or fees for technical services paid by Indian payers, are required to file their tax returns in India. This compliance is applicable even if the non-resident does not have a Permanent Establishment (PE) in India. The tax liability on the income from royalties and fees for technical services was already taken care of by the taxes withheld by the Indian taxpayers. Therefore, the Indian tax returns of the non-residents in such cases were largely a procedural formality containing a mirror image of the transaction reported by the Indian tax deductor.
The existing law provides exemption from filing of tax returns where the only income earned by the nonresident is dividend or interest on which due taxes are withheld by the Indian payer it is now proposed to exempt non-resident taxpayers from filing their tax returns in India if their only income from India is in the nature of dividend, interest, royalty or fees for technical services, if the Indian payer withholds taxes as per the rates provided under the Income-tax Act, 1961 (ITA)
This is a welcome change and will eliminate compliance burden on non-residents earning passive income from India While exemption is provided from filing of tax returns, the non-resident taxpayers will still be required to undertake Transfer Pricing compliances if the passive income is earned from its Associated Enterprises in India. For instance, where an Indian subsidiary pays management fees to its foreign holding company and withholds due taxes therefrom, the foreign company will be exempted from filing tax returns in India. However, it will still be liable to file Chartered Accountant’s Certificate in Form 3CEB for reporting transactions with its Indian subsidiary. The non-resident will be required to file tax returns in India if it has incomes other than interest, dividends, royalties and fees for technical services. The exemption from filing tax returns shall not apply if the non-resident opts for a tax treaty benefit where the treaty provides for rate of tax that is lower than the rates provided under the ITA. Where the tax rates under the ITA and the tax treaty are same, to claim exemption from filing tax returns, the tax withholding needs to be made by adding surcharge and cess to the rates provided under the ITA. The exemption from filing tax return will be dependent on the position taken by the tax deductor. Therefore, it is advisable that the non-resident taxpayers should actively engage with their Indian payers in relation to the tax deduction on incomes paid by them to the non-resident it needs to be examined whether this exemption shall apply to cases of “net-pay” arrangements where the withholding tax is borne by the Indian payer. This amendment is proposed from FY 2019-20 and will apply to the tax returns to be filed for FY 2019-20.
Increase in turnover limits for applicability of Tax Audit (from FY 2019-20)
Presently, a taxpayer engaged in business is required to get his books of account audited if his turnover, sales or gross receipts from business exceed INR 1 crore (INR 10 million), unless he complies with the presumptive taxation provisions of section 44AD. Also, in cases of individuals and HUF, the requirement to withhold taxes applies only if the taxpayer is subject to Tax Audit. It is now proposed to increase the turnover limit of Tax Audit for taxpayers engaged in business from INR 1 crore to INR 5 crore. This proposal is subject to the conditions that aggregate receipts in cash do not exceed 5% of total receipts, and Aggregate payments in cash do not exceed 5% of total payments. The taxpayer shall still be required to comply with withholding tax provisions even if he is not subject to Tax Audit due to the above proposal, if his turnover from business exceeds INR 1 crore.
The enhanced limit of INR 5 crore is applicable only in case of taxpayers engaged in business. It does not apply to professionals.
The calculation of the 5% limit is based on aggregate receipts and aggregate payments. It is important to note that the calculation is not with reference to incomes and expenses. Therefore, for calculation of the 5% limit, it may be possible to take a view that all business receipts and business payments should be taken into account. This could cover transactions of capital expenditure, loans, advances, deposits as well as receipts and payments on behalf of another person. These proposals are applicable for FY 2019-20 as well.
Changes in due dates for completion of Tax Audit (from FY 2019-20)
Presently, a taxpayer who is subject to Tax Audit is required to get his books of account audited by 30 September (non-transfer pricing cases) or 30 November (transfer pricing cases). The due dates for filing the tax returns in such cases are also 30 September and 30 November, respectively.
It is now proposed to separate the due date for completion of Tax Audit from the due date of filing the Tax Returns, as under: Compliance Existing Due.
In respect of partners of a partnership firm, it is proposed that the due date for filing the tax return shall be same for working partners and non-working partners.
This is a welcome proposal to delink the due dates for completion of Tax Audit from the due date of filing tax returns. This will ensure that taxpayers and tax professionals can focus on one activity at a time. The Finance Minister in her budget speech stated that with the above proposal, the Tax Department aims to provide a pre-filled tax return to the taxpayer which will also contain particulars reported in the Tax Audit Report. This will ensure that the instances of inadvertent mismatches between the Tax Audit Report and the Tax Return are avoided. These proposals are applicable for FY 2019-20 as well. The changed due dates shall equally apply to all Audit Reports to be obtained under the ITA. This could create a potential difficulty for reports such as Form 10B (for charitable trusts) or Form 29B (MAT certificate) where the Auditor is required to certify certain figures to be reflected in the computation of income. In such cases, the taxpayers could be required to finalize their tax computations before the due date of Tax Audits, even though the time limit for filing of tax returns is extended.There is no tax change in the due date of filing the return of income for taxpayers who are not subject to Tax Audit.
Additional information to be made available in Form 26AS (from 1 June 2020)
Presently, Form 26AS of a taxpayer contains information of taxes withheld on his income, taxes paid by him, taxes collected from him and refunds granted to the taxpayer. It is now proposed to expand the coverage of Form 26AS by including information regarding purchase and sale of immovable properties and transactions in shares and securities. Form 26AS will be renamed as Annual Financial Statement.
This is a welcome proposal to facilitate taxpayers to undertake appropriate tax compliances. It will also help taxpayers to avoid inadvertent omissions in reporting transactions in their tax returns.
Verification of Tax Returns (from FY 2020-21)
Presently, the tax return of a company and a Limited Liability Partnership (LLP) is required to be signed by the Managing Director and the Designated Partner, respectively. However, if for some reason the Managing Director or Designated Partner is not available, the tax return can be signed by any other Director or Partner. It is now proposed that the tax return of a company or an LLP can be signed by any other person prescribed by the CBDT.
This facility is being made available only to companies and LLP. It does extend to other categories of taxpayers such as Partnership Firms, HUF and Individuals.
Tax Collection at Source on sale of goods (from FY 2020-21)
Presently, there is no formal mechanism under the ITA to track transactions of sale and purchase of goods. It is now proposed that a seller shall collect TCS on sale of goods on consideration received from the buyer of goods in excess of INR 50,00,000. TCS shall be collected @ 0.10%. However, where the buyer does not provide his PAN or Aadhaar, the rate of TCS shall be 1%. The requirement to collect TCS shall apply only where the seller’s turnover or gross receipts in the preceding financial year were more than INR 10 crore (INR 100 million). This provision shall not apply if the seller is anyway liable to collect TCS under the existing provisions of the ITA.
This proposal is a massive move towards capturing information about sale and purchase of goods at source level. It shall enable the Government to weed out counterfeit sales and purchases of goods recorded for tax evasion purpose but which do not have substance in reality. It shall also enable tracking of tax compliance by the buyer of the goods and will enable enquiries into the source of income of the buyer to purchase goods.
On the other hand, this proposal shall substantially increase compliance burden on the seller, especially those in the FMCG sector. The seller will have to ensure appropriate collection of TCS, its deposit with the Government and appropriate filing of TCS returns on a quarterly basis.
TCS provisions apply at the time of debiting the account of the buyer or receipt of funds from the buyer, whichever is earlier. TCS is required to be deposited within 7 days from the end of the month in which it is collected. Therefore, where the seller is not able to recover the funds from his debtors in quick time, he may have to deposit the TCS from his own funds, which could cause stress on his working capital position.
The proposal is silent about how to deal with cases of sales return or write-oﬀ of debts. In either case, the seller would have deposited the TCS but may not be able to recover it from the buyer.
It is quite likely that the data submitted for TCS purposes could be compared with the data gathered by the GST regime and the taxpayer could be called upon to explain variation between the two.
This proposal applies only to sale of goods and does not extend to provision of services.
This proposal currently does not distinguish between resident buyers and non-resident buyers. Therefore, in its present form, the liability to collect TCS is applicable even on export sales. This position, it appears, is unintended and suitable clarifications are expected to be provided in due course.
Tax Withholding on E-commerce Transactions (from FY 2020-21)
India has seen rapid expansion of e-commerce transactions in the recent past. E-commerce transactions have an E-Commerce operator who owns or operates a digital platform through which the e-commerce transactions are carried out and E-Commerce Participants who are the suppliers or service providers catering to the requirements of the Customer.
In order to bring the participants of the e-commerce transactions within the tax net, it is now proposed to introduce withholding tax on E-Commerce transactions.
The E-Commerce Operator shall withhold tax on the transactions with a resident E-Commerce Participant @ 1% of the gross value of sale of goods or provision of services through the E-Commerce platform. Where the e-commerce participant does not have a PAN, tax shall be withheld @ 5%.
If the Customer makes payment directly to the E-Commerce participant, it shall still be the responsibility of the E-Commerce Operator to withhold taxes on such direct payments.
Tax shall be withheld at the time of credit to the account of the E-Commerce Participant or payment to the E-Commerce Participant, whichever is earlier.
Tax withholding shall not apply where the E-Commerce Participant is an Individual or HUF to whom the aggregate payments made during the financial year do not exceed INR 500,000 and if such Individual or HUF provide their PAN or Aadhaar Number to the E-Commerce Operator.
Once tax is withheld under this new provision, the payment made to the E-Commerce Participant shall not attract tax withholding under any other provisions of the ITA. However, this exemption shall not apply for amounts received by an E-Commerce Operator for hosting advertisements or providing services which are not in connection with the transaction of sale of goods or services by the E-Commerce Participant.
This is a radical proposal seeking to bring E-Commerce Participants within the tax net with minimum disruption. This proposal will require the existing E-Commerce Operators to relook at their business transactions with E-Commerce Participants to ensure appropriate tax withholding. Suitable modifications will also be required to the technology platform to ensure appropriate tax withholding and its reporting to the Government.
A key consideration is that payments made by Customers to the E-Commerce Participant will also require tax withholding, not by the Customer, but by the E-Commerce Operator. Since the trigger for tax withholding is payment or credit, whichever is earlier, the proposal presupposes that when a Customer makes payment to the E-Commerce Participant, the payment is effectively made by the E-Commence Operator. This may not necessarily be true in cases where the E-Commerce Operator is only functioning as a facilitator to bring the E-Commerce Participant and the Customer together.
There may also be a potential divergence with the GST regime. For instance, when a Customer buys goods through the E-Commerce Platform for business use, he gets a GST invoice issued by the E-Commerce Participant. Thus, the transaction is between the E-Commerce Participant and the customer, yet, it is the E-Commerce Operator who is required to withhold tax.
Tax withholding applies where the E-Commerce Participant is an Indian tax resident. However, there is no requirement that the E-Commence Operator is an Indian tax resident. Therefore, one wonders whether this proposal will extend to even non-resident E-Commerce Operators? A connected question that arises is that the liability to withhold taxes is a vicarious liability and not the primary liability and could it extend to non-residents who are otherwise not liable to withhold taxes in India?
Tax Collection at Source on remittances made under the Liberalized Remittance Scheme
(from FY 2020-21)
The Liberalised Remittance Scheme (LRS) is a scheme under the Indian Exchange Control regulations whereby individuals are permitted to make remittances outside India up to USD 250,000 without prior approval of the Reserve Bank of India.
Considering that the outward remittances under the LRS have increased manifold in the recent past, it is now proposed to widen the tax net by introducing Tax Collection at Source (TCS) on LRS remittances. It is proposed that Authorised Dealers who receive amount of INR 700,000 or more in a financial year from a tax payer for remittance outside India under LRS shall collect TCS @ 5% of such amount. Where the remitter does not provide his PAN or Aadhaar, TCS shall be collected @ 10%.
TCS shall not apply where:
The remitter was liable to withhold taxes on the remittance and he has withheld and paid the tax, or Where the remitter is the Government, Local Authority, Foreign Embassy, High Commission, etc.
Recent Media Reports have stated that the outward remittance under LRS increased from USD 5.45 billion during April 2009 to March 2014 to USD 45 billion since May 2014 (Source: Article in The Indian Express dated 16 September 2019). The present move from the Government seems to aimed at tracking the manifold increase in outward remittances.
The tax collected shall be available as a credit to be oﬀ-set against the regular tax liabilities of the remitter. Tax Collection at Source on payments for Overseas Tour Packages (from FY 2020-21)
It is proposed to introduce TCS @ 5% on payments received by a Tour Operator for an overseas tour package. Where the traveller does not provide his PAN or Aadhaar to the Tour Operator, the rate of TCS shall be 10%
Overseas Tour Package is defined to mean any tour package which oﬀers visit to a foreign country and includes expenses for travel or hotel stay or lodging or boarding or any expense relating thereto.
The Government has been actively focussing on capturing information regarding foreign tours made by Indian taxpayers and compare them to their reported sources of income. This proposal is another step in that direction to actively capture information about foreign travel.
The tax collected shall be available as a credit to be oﬀ-set against the regular tax liabilities of the traveller.
Reduction in withholding tax rate for fees for technical services (from FY 2020-21)
Presently, fees for technical services paid to Indian residents attract tax withholding @ 10% [Section 194J]
It is now proposed to reduce the rate of withholding tax on fees for technical services paid to resident taxpayers from 10% to 2%
This proposal will help to reduce litigation around determining appropriate withholding tax rate in respect of repair and maintenance contracts. Taxpayers usually consider these contracts as ‘contract for work’ under section 194C attracting tax withholding @ 1% / 2%. The Tax Authorities often dispute this position by contending that repair and maintenance contracts require application of technical skill and therefore should be considered as fees for technical services under section 194J attracting tax withholding @ 10%. With reduction in withholding tax rate, this dispute shall become academic.
The withholding tax rate on professional services remains unchanged @ 10%
It will be important to classify services between ‘professional services’ and ‘technical services’. The term ‘technical services’ is defined as managerial, consultancy or technical services. This definition is thus very widely worded and will require careful consideration. It may be worthwhile to refer to the definition of professional services (which is considerably illustrative) and based on the same, determine whether a particular service qualifies as technical service or professional service. The reduced withholding tax rate is applicable only in case of Indian residents. The withholding tax rate on fees for technical services paid to non-residents remains unchanged @ 10%
Modifications to provisions for withholding tax on contractual payments (from FY 2020-21)
Presently, tax is required to be withheld on payments to job-workers who manufacture or supply a product to a customer by using material purchased from such customer. Withholding tax is not applicable where the job-worker purchases materials from persons other than the customer.It was observed that the tax withholding provisions were circumvented by having the job-worker purchase the material from an associate of the customer instead of purchasing the material from the customer. It is now proposed that withholding tax provisions shall apply even where the job-worker purchases material from an associate of the Customer. The term ‘associate’ shall be considered on similar footing as the existing definition of related parties under the ITA.
This is an anti-abuse proposal aimed at rationalising the withholding tax regime.The term ‘associate’ is defined as a ‘person who is placed similarly to the customer’ as a related party. This definition is ambiguous and requires suitable clarifications.
Introduction of Dispute Resolution Scheme (Vivaad se Vishvas Scheme)
The Finance Minister, in her Budget Speech, announced that the Government shall launch a dispute resolution scheme to settle Income tax disputes pending before any appellate authority. The operational details of this scheme are yet to be announced. Under the proposed scheme, the taxpayer shall be required to deposit the entire tax disputed before the appellate authorities and will be eligible to get waiver of entire interest and penalty.As per the Budget speech, the taxpayer will be eligible for this scheme if he deposits the entire tax due by 31 March 2020. Taxpayers will be eligible to participate in this scheme post 31 March 2020 up to 30 June 2020 by making payment of tax and an additional amount, which will be specified in due course.
This is a welcome step from the Government to resolve long pending tax disputes. The payment required to be made by the taxpayer appears reasonable considering that the disputes shall be settled expeditiously. The scheme will help address cases where appeals were filed by the taxpayers only to keep the matters alive or as a potential protection from penalty proceedings. The operational details of the Scheme are yet to be announced. Given that the first timeline under the proposed scheme is 31 March 2020, it is expected that the details shall be announced shortly.
Insertion of Taxpayer’s Charter (from FY 2020-21)
In order to protect taxpayer rights, it is proposed that the Central Board of Direct Taxes shall have the statutory powers to adopt and declare a Taxpayer’s Charter and issue such orders, instructions, directions and guidelines to the Tax Authorities, as may be required.
This is a well-intentioned proposal to provide a statutory framework for Taxpayer rights. Having said that, we are sceptical about the results that the Taxpayer Charter shall achieve. The Tax Department presently has a self-declared Charter for Citizens, which, practical experience suggests, is not being consistently followed in practice. The present challenges of the Tax Administration emanate from certain time-limits that are directory and not mandatory, pro-revenue interpretations of law by the Tax Oﬃcers, target-based assessments and recovery proceedings and technological glitches. These issues require a sustained and structural mechanism to be addressed over a period of time.
Introduction of electronic appellate proceedings and electronic penalty proceedings
(from FY 2020-21)
Presently, the scrutiny assessment (Revenue Audit) proceedings are conducted electronically in a face-less manner. With a view to usher in greater transparency in appellate proceedings, it is now proposed to introduce a scheme for conducting first-level appellate proceedings before the Commissioner of Income-tax (Appeals) and the penalty proceedings before the Income Tax Authorities in an electronic manner. Further, these proceedings could be initiated with ‘dynamic jurisdiction’ thereby implying that the relevant authority hearing the matter could be located at a place other than the location of the taxpayer.It is also proposed that the electronic assessment proceedings shall also cover best judgment assessments under section 144 of the ITA.
The procedures and operational details of this Scheme shall be announced by the Government by 31 March 2022.
This proposal is a well-intentioned proposal to usher in greater transparency and eﬃciency in appellate proceedings and penalty proceedings. However, if the recent experiences with electronic assessments are taken into account, the electronic system presently is clogged with human and technological challenges. It has been observed that the taxpayers and tax administration have presently not come to terms with electronic proceedings. Therefore, it is felt that the existing system of electronic assessments should be first stabilised before launching this initiative. Separately, while the intention behind the proposal is noble, it poses a fundamental question about the rights of the aggrieved party. Right to be heard in person is a fundamental right in any judicial proceeding, especially when the matter is being pursued by an aggrieved person, which, cannot be overlooked and unintentionally taken away. It may be prudent to let the taxpayer make the choice of whether he wants the proceedings to be conducted in person or through electronic mode.A connected aspect that merits consideration is that the ordinary Indian taxpayer and his supporting ecosystem is still not entirely comfortable in English Communication. Based on taxpayer feedback, it is felt that a taxpayer may be able to articulate his position clearly when he speaks in his business language, which may not necessarily be English. In such a scenario, ends of justice could be better met through in-person hearing, which brings us back to the fundamental right of being heard in person.
Penalty for fake invoices (from FY 2020-21)
Based on the data gathered by the GST Authorities, certain cases of fake invoices for sale and purchase of goods and services without their actual supply, were observed. In order to curb the menace of fake invoices, it is now proposed to levy penalty on the taxpayer if it is found that he has made a false entry in his books of account or has omitted any entry to evade tax liability. This penalty is also proposed to be levied on any person who causes the taxpayer, in any manner, to make any false entry or omit any entry. The penalty in both the above cases shall be equal to aggregate amount of false entries or omitted entries The false entries shall include: Forged or falsified document such as a false invoice or false piece of documentary evidence Invoice without actual supply or receipt of goods or services or both.
Invoice to or from a person who does not exist.
This proposal casts an onerous responsibility on the taxpayer and his ecosystem to justify his transactions and entries in the books of account. The penal provisions apply to the taxpayer as well as any other person. The term ‘any other person’ is wide enough to cover the taxpayer’s accountants, advisors and any person associated with his financial matters. The case of invoices ‘from a person who does not exist’ is also quite wide. For instance, it could cover genuine cases of purchases from a supplier who subsequently absconds for any reason or a supplier who cannot be traced. At a level of stretch, it may also cover cases of companies which are subsequently wound-up or struck-off by the Registrar of Companies, firms that get closed or individuals who are no longer alive. There is no corresponding amendment made in section 273B. Section 273B provides that penalties shall not be levied for any alleged offence if the taxpayer had a reasonable cause for conduct resulting in the allegation of an offence.
Also, corresponding amendments are not made permitting the taxpayer to file an appeal to the appellate authorities against any order of penalty passed under these proposals. As things stand today, any order of penalty for fake invoice cannot be appealed against, under the ITA. This position, it appears, is an inadvertent omission and it is expected that the same is rectified during the course of discussion on the Finance Bill in the Parliament of India.
Restrictions on powers of Income Tax Appellate Tribunal to grant stay of disputed tax demand (from FY 2020-21)
Presently, for matters pending before the Income Tax Appellate Tribunal (ITAT), the taxpayer has the right to seek stay of disputed tax demand. The ITAT can grant stay for a period of 180 days. Stay beyond 180 days can be granted if the ITAT is satisfied that the delay in concluding the appeal is not attributable to the taxpayer.
The law provides that the maximum period of stay granted by the ITAT cannot exceed 365 days. Further, stay of demand can be granted on such conditions as the ITAT may think fit to impose certain benches of the ITAT have taken a position that despite the maximum period of 365 days provided under the ITA, the ITAT, being a judicial body, has an inherent power of granting stay of demand beyond 365 days.It is now proposed that the ITAT can grant a stay of demand subject to the condition that the taxpayer deposits ‘not less than’ 20% of the disputed tax, interest, fee, penalty or any other sum under dispute or furnishes a security for the same it is also proposed that in cases where stay has already been granted by the ITAT at present, a further stay beyond 180 days can be granted only if the taxpayer deposits ‘not less than’ 20% of the disputed tax, interest, fee, penalty or any other sum under dispute or furnishes a security for the same it is also proposed to provide that the total stay granted by the ITAT cannot exceed 365 days.
This proposal appears to be a revenue mobilization measure to make deposit of at least 20% of the disputed amount to secure stay of demand from the ITAT. The proposal will cover even existing cases where stay has been granted and which come up for renewal due to expiry of the 180 day period.
For grant of stay by the Assessing Officer, the existing CBDT Instructions require payment of 20% of disputed demand. However, the Supreme Court of India, in the case of L G Electronics, has held that stay can be granted with payment of less than 20% of demand in deserving cases. Since the guidance for stay before the Assessing Officer is by way of an instruction, the decision of the Supreme Court prevails over the same. However, now that the condition of stay of demand before the ITAT has been given a statutory backing, it needs to be examined whether the Supreme Court decision will still prevail in matters of stay before the ITAT.
The Explanatory Memorandum to the Finance Bill, 2020 states that the ITAT cannot grant stay beyond a period of 365 days. However, the manner in which the amendment is drafted indicates that there is no much change from the existing provisions. As such, one wonders whether the amendment will have material effect on the position taken by certain benches of the ITAT that the ITAT can grant stay of demand beyond the period of 365 days as well.
Option to approach Dispute Resolution Panel extended to all non-residents (from FY 2020-21)
Presently, a taxpayer can approach the Dispute Resolution Panel (DRP) where the Assessing Officer proposes tax adjustments under the transfer pricing provisions or in any matter relating to foreign companies. Non-resident taxpayers other than companies are not presently eligible to approach the DRP for non-transfer pricing disputes. It is now proposed to extend the facility of approaching the DRP to all categories of non-residents.
This change seems to bring an alignment between the provisions of Advance Ruling with DRP proceedings. However, the existing experience with the DRP route leaves room for improvisation. Our practical experience suggests that since the order of the DRP cannot be appealed against, by the Tax Authorities, there is some hesitation in granting relief to the taxpayer. While providing the facility to all non-resident taxpayers to approach the DRP is a welcome move, in absence of corresponding amendments to strengthen the DRP route, the results sought to be achieved by this proposal appear circumspect. The Budget 2020 proposes to introduce electronic appeal proceedings for matters before the Commissioner of Income-tax (Appeals). However, the electronic proceedings are not presently initiated for matters before the DRP. The non-resident non-corporate taxpayer could thus face difficulties in appearing in person before the DRP. Separately, while alternative dispute resolution mechanisms are being provided to non-resident taxpayers, there is a strong case to extend such facilities to resident taxpayers as well.
Extension of tax holiday provisions for start-ups (from FY 2020-21)
Presently, eligible start-ups are entitled to a tax holiday of 100% of their profits for 3 consecutive years out of the first 7 years from their year of incorporation. This benefit is available if the turnover of the eligible start-up does not exceed INR 25 crore (INR 250 million) during the entire 7-year period [Section 80-IAC]
It is now proposed that the benefit of tax holiday will be given for 3 consecutive years out of first 10 years from the year of incorporation. Further, the turnover limit of INR 25 crore has been increased to INR 100 crore.
This is a welcome change and will be beneficial to start-ups. It is important to note that the benefit is only for “eligible” start-up i.e. start-up which holds a Certificate from Inter-Ministerial Board of Certification.
Deferment of taxation for ESOP for eligible start-ups (from FY 2020-21)
Presently, ESOP are taxed as salaries at the time of exercise of a stock option. Since ESOP are a cash-less benefit, the tax arising at the time of their exercise need to be paid by the employee from his own sources (or withheld by the employer from the salaries paid). It is now proposed to that, in case of eligible start-ups, ESOP shall not be taxed at the time of exercise of options. Tax shall be levied on occurrence of earliest of the following events (